CalPERS Cuts Tiny Town’s Pensions By 60 Percent

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Doing what it has never done before, the CalPERS board voted yesterday to slash the pensions of all five former employees of a small Sierra County town, Loyalton, by an estimated 60 percent.

It’s a rare situation in which Loyalton, population 769 in the last census and shrinking since the closure of a century-old sawmill in 2001, voluntarily terminated its CalPERS contract in March 2013 without paying off its $1.7 million pension debt.

A New York Times headline last month said the nation’s largest public pension fund ($300 billion) giving little Loyalton a pay-up-or-else ultimatum would be a “test of ‘bulletproof’ public pensions.”

A staff report said CalPERS went to unusual lengths to avoid blowing a big hole in the Loyalton pensions — 50 telephone calls and 10 collection notices — and waited more than three years before pulling the trigger on the deep pension cuts.

A divided Loyalton city council attempted to get back into CalPERS, talked about getting a loan with installment payments, and pleaded ignorance about the need to pay off the big debt to preserve the pensions of four retirees and one person not yet retired.

The division continued yesterday after the CalPERS board was told the Loyalton city council voted the previous day to make payments from the city budget to replace the roughly 60 percent cut in the pensions, ensuring that retirees receive 100 percent of the promised amount.

Loyalton Councilwoman Patricia Whitley, a former mayor who voted to leave CalPERS, said the council voted unanimously this week to offer the retirees a supplemental city payment to restore their full pensions.

“It’s really not a settled thing,” said Whitley. “The employees have to agree. We have to have some sort of agreement between us, because now it becomes a contract between us and the employees.”

Loyalton Mayor Mark Marin said there was no vote at the council meeting this week, only an understanding, and he was skeptical about the retirees accepting the proposal.

“The employees are not going to go for this,” Marin said. “The city is so broke. They will start paying the benefits. But what happens if the city goes bankrupt? Then people are screwed.”

Marin said some of the retirees are talking to an attorney about possible legal action. A CalPERS staff report said there is a risk that a pension cut could trigger an employee lawsuit against the city requiring CalPERS involvement.

Whitley has said a 50 percent pay raise that may not have been legitimate increased the cost of unaffordable pensions. The CalPERS report said Loyalton generously increased its pension formula to “2.7 at 55” in 2004, more than the “2 at 55” for most state and school workers.

Marin said he has been told that the vote to leave CalPERS may have been illegal because it was done as an “emergency” action. He said city council members wanted to divert the pension contribution to a city museum and other uses.

“PERS has been really good to us,” said Whitley. “They have at least listened to us and taken it to heart. So we have gained some mutual respect, I think. This is really their first case, I guess.”

Marin said he thinks “Pandora’s box” was opened by the CalPERS vote to let Loyalton off the hook for its pension debt: “It’s going to open it up big time. There is going to be other cities doing this crap, because Loyalton got away with it.”

Putting a lien on Loyalton assets or attaching its revenue were mentioned at the CalPERS board in September. But the financially distressed city would be further harmed, the board was told, and cities often are able to block attempts to take their revenue.

Modest annual pensions are shown for three Loyalton retirees in 2015 on Transparent California, a searchable public database on the internet that lists the pay and pensions of state and local government employees and retirees:

The giant California Public Employees Retirement System, with more than 2,000 pension plans for more than 3,000 government employers, maintains a pool to pay the pensions of retirees in terminated pension plans.

The Terminated Agency Pool paid $4.7 million to 716 retirees and beneficiaries from 93 terminated plans last fiscal year. The pool has a large surplus and was 261.9 percent funded as of June 30, 2014.

If its financial health allows, the pool can under state law continue to pay the full pensions of retirees whose employers did not pay off their debt — but not when, like Loyalton, the employer voluntarily terminates its CalPERS contract.

So, apparently for the first time, CalPERS declared an employer, Loyalton, in default and cut the pensions of its retirees “in proportion” to the amount of the debt. The Loyalton debt was 39.5 percent funded as of March 31, 2013.

An updated calculation could change the estimate of a 60 percent pension cut. Until then, said Whitley, Loyalton won’t know whether the payments offered retirees will be more or less than the annual contributions the city had been making to CalPERS.

The large CalPERS termination fee for Loyalton’s five modest pensions, $1.66 million, is the amount CalPERS expects to need to make the lifetime payments with no new contributions from the city or active employees.

CalPERS had been using its investment earnings forecast, now 7.5 percent, to calculate termination fees before switching in 2011 to a risk-free bond rate, 3.25 percent recently, that sharply boosts the regular debt or “unfunded liability.”

A federal judge in the Stockton bankruptcy said a termination fee that boosted the city’s pension debt from $211 million to $1.6 billion was a “poison pill” if the city tried to move to another pension provider, such as a county pension system.

Several small cities that considered leaving CalPERS did not after looking at the high termination fee, among them Pacific Grove, Villa Park, and Canyon Lake. CalPERS has given employers a hypothetical termination fee in their annual plan valuations since 2011.

The CalPERS viewpoint: If the terminated pool falls short under the collapse of a large pension plan, the funds of all the state and local government plans in CalPERS could be used to cover the shortfall, possibly jeopardizing their ability to pay pensions.

The CalPERS board president, Rob Feckner, said in a news release the Loyalton pension cuts, made with regret, are part of a fiduciary duty to keep CalPERS funding secure by ensuring that employers adhere to contracts.

“When they don’t, the law requires us to act,” he said. “The people who suffer for this are Loyalton’s public servants, who had every right to expect that the city would pay its bill and fulfill the benefit promises it made to them.”

As for two other delinquent employers given demand letters, the CalPERS staff report said, the California Fairs Financing Payment made a “significant” payment last month and expects to be “fully current by June 30, 2017.”

The Niland Sanitary District is voluntarily terminating its CalPERS plan. The staff report said there is reason to doubt Niland’s claim of no active employees since 2013, which will be checked by an audit.